December, 2010

Société Générale: After what seems like months of gossip and market speculation, today has seen the first launch of physically backed exchange traded funds (ETFs). Following on from their announcement on Tuesday December 7, ETF Securities launched copper, nickel and tin ETFs today, beating other bigger metals players such as JP Morgan and Blackrock to the mark. Indeed, the Tuesday announcement help push LME 3-month copper prices to new record highs in trading on Wednesday of $9,091/t.

With the launch the issue of costs has been given clarity. Indeed, ETF Securities management fee for the launched funds is 0.69% per annum. However, on top of this are insurance costs set at 0.12%, and of course storage costs. For copper, the storage costs are $0.36/tonne per day, for tin, $0.42/tonne per day, and for nickel$0.45/tonne per day. It will be interesting to see if JP Morgan's storage rates, given they have their own warehousing network (Henry Bath) will be more competitive, or for that matter those for the BlackRock fund, given the relationship with Goldman Sachs and their warehouse group, Metro International. Deutsche Bank, who are operating as ETF Securities custodian have no such warehousing network.

Currently, ETF Securities, as well as JP Morgan and BlackRock plan to keep metal backing funds in LME warehouses. However, if these physical holdings could become subject to the LME's lending guidelines. However, we firmly believe that if funds are successful, they will have no option but to hold metal in non-LME warehouses in LME deliverable locations, to ensure the LME cannot hamper the operations of such funds. We have heard the suggestion that tonnages could simply be held as cancelled warrants in LME warehouses, but see this as problematic. Indeed, one would question that the LME would have to intervene if on warrant stocks fell to critically low levels, but cancelled warrants grew to represent the bulk of material in LME warehouses, particularly if it was clear material was not actually be shipped.

Ends --

David Wilson
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